Directors' Duties and Liabilities in China
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Directors’ Duties and Liabilities in China Bestuurdersaansprakelijkheid in China Proefschrift ter verkrijging van de graad van doctor aan de Erasmus Universiteit Rotterdam op gezag van de rector magnificus Prof.dr. R.C.M.E. Engels en volgens besluit van het College voor Promoties De openbare verdediging zal plaatsvinden op donderdag 19 november 2020 om 13.30 uur door Xun Xiao geboren te Tangshan, China 1A_BW EdleXun_stand.job Promotiecommissie Promotor: Prof.dr. M.G. Faure LL.M. Prof.dr. Y. Li Overige leden: Prof.dr. N.J. Philipsen Prof.dr. C.A. Schwarz Prof.dr. S. Wei 1B_BW EdleXun_stand.job Acknowledgement It is a great opportunity for me to pursue PhD research and experience the academic culture at Erasmus School of Law. When I look back upon this academic journey, my heart is full of gratitude and appreciation. First, I would like to express my deep gratitude to my supervisor Professor Yuwen Li. Without her enduring support and encouragement, this research can hardly be accomplished. Moreover, I gained more understanding of the purpose and meaning of academic research from her systematic observations on China’s rule of law and passionate devotion to various research programs. Her guidance and influence helped me to navigate my way through the challenges of research and life. Similarly, I would like to thank my other supervisor Professor Michael Faure. His sharp and insightful comments and tough working style have kept me under great pressure, from which I have benefitted a lot. In addition, he has encouraged me to join law and economics seminars to broaden my horizons. It’s really amazing to comprehend an interdisciplinary methodology to address a wide range of legal and policy issues. Second, thanks go to the faculty of the RILE (Rotterdam Institute of Law and Economics). There are always many take-aways in every Thursday’s seminars where all the professors and PhD students of RILE get together. I owe my sincere gratitude to Professor Klaus Heine and Professor Alessio Pacces for their informative and constructive advice. I’m also grateful to my officemate Dr. Alexandre Biard. He had a serious talk with me when I had a thought of quitting. Thank Dr. Katherina Hunt for filling our office with a lot of fun, the surfing board and doing 1V1 push-ups with Alex. I would like to thank Dr. Hossein Nabilou, Shivans, Dr. Kateryna Grabovets, Dr. Claire Ledger, Dr. Hadar Y. Jabotinsky, and Talita Erickson for their kind helps when I had just started my PhD. Also, I’m grateful to Dr. Hong Wei, Dr. Jingyuan Ma, Dr. Weiqiang Hu for generously sharing their experience and opinions. Thank you to Marianne, Ipek for taking care of administrative formalities. Third, I would like to give my appreciation to the ECLC (Erasmus China Law Center) friends and colleagues. With Dr. Ma Yun, Dr. Pei Wei, Xin Wen, I had warm and happy time even though the weather is desperately bad. Many thanks to Dr. Yixin Xu, Dr. Cheng Bian, Dr. Yang Feng, Dr. Bo Yuan, Dr. Qianyun Wang, Fu Qiqi, Ji Yuhan, Liu Shuo. We were, like a big family, supporting each other in academic research, having brown bag lunch seminars and other routine meetings, and celebrating Chinese traditional festivals. Because of them, I felt less home sick during my time in the Netherlands. I 2A_BW EdleXun_stand.job Finally, I’m always indebted to my parents for their selfless and forever love, support, and care. Special thanks go to Dr. Yongchang Hu for your faithful companion, unconditional love, and good sense of humour. Yuantai, my little boy, welcome to the world and let’s learn and grow together! II 2B_BW EdleXun_stand.job Table of Contents Acknowledgement ................................................................................................................... I Abbreviation ........................................................................................................................ IX Tables and Figures .............................................................................................................. XI Chapter 1 Introduction 1.1 Research Background ....................................................................................................... 1 1.2 Research Questions .......................................................................................................... 5 1.3 Academic and Practical Relevance .................................................................................. 8 1.4 Methodology and Materials ........................................................................................... 10 Literature review ........................................................................................................... 10 Economic analysis of law ............................................................................................. 10 Legal doctrinal analysis ................................................................................................ 11 Analysis of judicial decisions and administrative penalty decisions ............................ 11 Comparative analysis ................................................................................................... 12 1.5 Structure ......................................................................................................................... 13 1.6 Scope of Study and Limitations ..................................................................................... 14 Chapter 2 Law and Economics of Directors’ Duties and Liabilities 2.1 Introduction .................................................................................................................... 17 2.2 Law and Economics of Corporate Entities ..................................................................... 17 2.2.1 The Nature of the Firm ............................................................................................ 18 Neo-classic economic theory of the firm ....................................................................... 18 Early works on the nature of the firm ........................................................................... 18 Transaction cost approach ........................................................................................... 20 Property right approach ............................................................................................... 21 Agency theory ............................................................................................................... 22 2.2.2 Structural Characteristics and Constituent Parties ................................................... 23 Separate legal personality ............................................................................................ 24 Limited liability ............................................................................................................. 24 Transferable shares ...................................................................................................... 25 Equity ownership .......................................................................................................... 25 III 3A_BW EdleXun_stand.job Centralized management under a board structure ....................................................... 26 2.3 Agency Theory ............................................................................................................... 26 2.3.1 Agency Problems ..................................................................................................... 27 2.3.2 Contractual Incompleteness ..................................................................................... 29 2.3.3 Imperfect Market Disciplining Mechanisms ........................................................... 29 Product market ............................................................................................................. 30 Capital market and incentive schemes .......................................................................... 31 Managerial labour market ........................................................................................... 31 Market for corporate control ........................................................................................ 32 2.4 Why Law Matters ........................................................................................................... 33 2.5 Function of Directors’ Duties and Liabilities ................................................................. 35 2.5.1 The Fiduciary Duty Principle in General ................................................................. 36 2.5.2 Duty of Loyalty ........................................................................................................ 37 2.5.3 Duty of Care ............................................................................................................ 39 Business judgment rule ................................................................................................. 40 Limited liability provision, indemnification, and insurance ........................................ 41 Debate on the role of monetary liabilities .................................................................... 42 2.6 Conclusion ...................................................................................................................... 46 Chapter 3 Corporate Governance and Board of Directors in China 3.1 Introduction .................................................................................................................... 49 3.2 Categorization of Enterprises ........................................................................................